The CAPM is Not Dead: It Works Better for Average Daily Returns

In a series of papers, Fama and French showed that the CAPM failed to explain U.S. stock returns. Subsequently, they declared the CAPM dead. In its place, they proposed a number of different factors to better explain stock returns. Given that Sharpe received the Nobel Prize in Economics for the CAPM, their conclusion that it is dead is worth further investigation. This paper revisits cross-sectional tests of the Capital Asset Pricing Model (CAPM). To mitigate problems with noise in realized stock return series, we use a smoothed data series of average daily returns per month. Based on U.S. stock returns from 1965 to 2015, we find that, confirming Fama and French, beta is not priced for realized monthly returns. However, contrary to their findings, when we use average daily returns per month, we find that beta is significantly priced for average daily returns in equal-weighted stock portfolios. Further analyses reveal that popular factors proposed by Fama and French and others are more significantly priced for average daily returns also. Given that the CAPM is better supported by average daily returns per month than realized monthly returns, we conclude that it is not dead.